Macroscope | Despite the risks, China’s green bonds will prove rewarding for global investors

Name: Fresh sandstorm hits Beijing following its worst storm in a decade
Uploaded: 2021-04-22T00:45:15.000Z
Duration: 1 min 45 s
Description: Fresh sandstorm hits Beijing following its worst storm in a decade

The market, already the world’s second largest, is expected to grow further in size, depth and liquidity to meet China’s ambitious net-zero carbon target

Strengthening information disclosure and a more rigorous definition of what counts as a green bond will add to the appeal, on top of its diverse offerings and high yields

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A Chinese flag is seen on the top of a car near a coal-fired power plant in Harbin, Heilongjiang province, in November 2019. To smooth the way for international investors to enter China’s green finance market, the PBOC this year revised issuance guidelines to remove “clean utilisation of fossil fuels” from the list of projects that can qualify as “green”. Photo: Reuters

Aidan Yao

Published: 8:45am, 22 Apr 2021Updated: 8:45am, 22 Apr 2021

While China may be late to the global game of eliminating carbon emissions, its commitment is an ambitious one – to achieve net-zero emissions by 2060.

As the world’s largest emitter, China’s goal will require trillions of yuan in new investments to revamp its carbon-intensive economy and energy system over the coming four decades. The green bond market in China, developed to mobilise private-sector resources to facilitate this transformation, has tremendous growth potential.

For global investors, there are a number of reasons the Chinese green bond market could appear attractive. First, it is large enough to accommodate significant foreign investor participation.

Green bonds as such did not exist in China until late 2015 but, since then, the country has become the world’s second-largest market, with about a 13 per cent share. Building on the stellar growth momentum, the market is set to grow further in size, depth and liquidity to meet China’s net-zero target.

Second, the market offers a decent level of diversification in terms of project and credit exposure. In China, green bonds finance a wide range of environmental projects, with an emphasis on pollution reduction, ecological protection, resource conservation and global warming mitigation.

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Fresh sandstorm hits Beijing following its worst storm in a decade

Transport – mostly electric vehicles and railway projects – and energy – predominantly renewable fuels, such as wind and solar – account for over 50 per cent of green bond issuance in 2019. Water conservation, waste management and high-efficiency building construction account for the vast majority of the rest. This composition is broadly in line with the global aggregate, but more diverse than many smaller markets, which can be quite concentrated on clean-energy projects.